Speculation that Italy might be next in line to ask for a bailout fuelled doubts this approach can succeed given the size of the two economies. As a result, the Dow Jones fell 140 points to 12,411 unable to shrug off ongoing fears about Europe.

This is the real problem at the moment in that it’s Europe dominating the financial markets and we saw a swift reversal in the fortunes of equity investors as the bond yields for Spain spiked the most in four months. If ever there was an indication of scepticism over a bailout then this is one. Now we see that the fourth domino is likely to fall, not Italy, but a much smaller one in the form of Cyprus which is not going to exactly spook the markets but is more symbolic for the eurozone that seems to be falling apart. But you can’t ignore Italy either as this is the next big worry. Investors in Italian stocks showed that concern as their stock market fell over 2% yesterday and is down almost 1% this morning.

For Spain the big issue is that it has created a vicious circle where the state it is bailing out the banks that own its debt. Following the LTROs from the ECB Spanish banks gorged themselves on their own country’s bonds whilst other private investors stayed away and so we have a position where the potential for the country defaulting is fast becoming a reality and it’s their own banks that will be hit the hardest if that occurs. At the same time EU politicians still insist on introducing a financial transaction tax that will cripple the banks even further!

The FTSE was being called to open 10 points lower this morning but has opened 10 points higher at 5442 as the see-saw action looks set to continue. Clients were finding trading conditions tough yesterday. With so little in the way of corporate or economic data for the rest of this week investors are likely to focus on the Greek vote this week end, but there is manufacturing and industrial production from the UK this morning. This is expected to paint a mixed picture but show that the UK’s manufacturers are neither in the worst nor the best of shape. They’ll be delighted to see oil prices tumbling and have seen the input prices tumble recently, but their biggest customers across the English Channel are in dire straits.

The euro opened higher versus the greenback, reaching an intraday high of 1.2668, largely on hopes the European officials mean business. However, the viability of Spain’s multibillion aid plan came into questioning and the risk-off sentiment in the global markets took over once more. The session ended sharply down at 1.2465 with investors not buying it yet. This morning EUR/USD is a little higher following the sharp reversal yesterday at 1.2500.

Gold prices rose only marginally, $1.85 to $1594.85 as initial optimism failed to spur significant demand. By and large the precious metal fell victim to a US dollar getting stronger throughout the day despite opening lower. So we saw again one of those days when gold’s safe haven attributes were discarded by the inverse correlation with the greenback.

Amid weakness in the global economy the Saudi Oil Minister was quoted saying his country would need a higher output ceiling. The effect was an accentuation in already plunging WTI crude oil prices which closed $2.92 down at $82.70. The US decided to expand the list of nations exempt from sanctions after they reduced their buying from Iran, thus delivering a further blow to crude oil bulls.